The Washington Post – King of the Bad-News Bulls; WorldCom’s Distresses Are Investor David Matlin’s Successes
Christopher Stern, October 10, 2003

To thousands of investors, WorldCom Inc.’s revelation on June 25, 2002, that it had committed the largest fraud in history was a shrill alarm warning of impending financial disaster. But for David J. Matlin, the announcement was more like a starting gun going off in a race to take control of the company.

Matlin, 42, is considered a superstar among a small group of financiers who invest in failing companies, betting on turnarounds. His move on WorldCom not only netted his investment firm hundreds of millions in profits but also put the chief executive in position to help oversee management of the nation’s second-largest long-distance telephone company.

He did that by taking advantage of the bankruptcy process. As soon as WorldCom’s fraud was disclosed, MatlinPatterson Global Advisers LLC began buying up company bonds, whose value was plummeting so quickly they could be acquired at an average price of less than 15 cents on the dollar.

By taking on the debt, Matlin’s firm hoped to take control of the phone giant when the bankruptcy process inevitably forced WorldCom to settle with its creditors. Although MatlinPatterson fell short of that goal, the fund did succeed in becoming one of the largest stakeholders in the Ashburn-based company, and its holdings have since doubled and tripled in value as the risk of WorldCom’s demise has diminished. Sources say MatlinPatterson is already showing an $800 million gain on the stake.

When a company files for bankruptcy, its obligations shift from serving shareholders to paying off creditors. Those holding the most debt typically find themselves in the driver’s seat as the company sorts out its future, according to Nell Minow, editor of the Corporate Library, an investment research firm that specializes in corporate governance issues.

“It’s like Filene’s. Whoever gets there first gets the goodies,” Minow said.

Matlin’s large stake gave him a seat at the table as WorldCom crafted its reorganization plan. That plan gives Matlin the option of trading the WorldCom bonds his fund owns for cash or stock in the new company. If he opts for stock, as many insiders expect, Matlin’s fund could control about 20 percent of the telecommunications company. WorldCom could complete the bankruptcy process as early as November, when it plans to officially change its name to MCI.

Matlin has already asked for and received a seat on the new company’s board, signaling his intention to stick around for a while. The only other investor with a stake anywhere near the size of MatlinPatterson’s is Mexican billionaire Carlos Slim. In contrast to Matlin, Slim has played no real role in WorldCom’s bankruptcy, according to sources. Slim is also a board member of MCI nemesis SBC Communications Inc. and is the owner of Mexico’s largest phone company, Telefonos de Mexico SA.

Matlin declined to comment for this article; details of his involvement in WorldCom were confirmed by people familiar with his investment strategy and those who have been part of the reorganization process.

Although WorldCom seems to be firmly on track to emerge from bankruptcy, rival telecommunications companies and disgruntled investors are doing their best to derail it. Matlin stills runs the risk of losing hundreds of millions of investors’ dollars if the bankruptcy becomes prolonged or the company topples into insolvency and is forced to liquidate its assets.

“The normal modus operandi of a distressed investor is coming in and buy things when they scare the hell out of other people and to sell them at a fair value when everything settles down,” said Douglas Teitelbaum, a principal with Bay Harbour Management, another firm that focuses on investing in financially distressed companies.

Like most of his peers, Matlin shies away from the spotlight. Few outside of Wall Street were even aware of his fund’s stake in WorldCom until last fall, when he began urging the company to give former New York mayor Rudolph W. Giuliani a prominent role in management — perhaps even the chairmanship.

At the time, Matlin was worried about the leadership of a company in which he had invested so heavily. WorldCom’s founder and former chairman, Bernard J. Ebbers, had just been pushed out after revelations that the company had lent him $400 million to cover personal stock losses. Ebbers’s replacement, John W. Sidgmore, was in a power struggle with several board members.

Sources said Matlin backed Giuliani as a strong candidate to step in and quiet the turmoil. Giuliani at the time was riding high, still basking in the glow of the rave reviews he received for leading New York in the days and weeks immediately following the terrorist attacks of Sept. 11, 2001. To Matlin, Giuliani seemed like a perfect fit for the troubled company.

But just as Matlin began mounting his campaign for Giuliani, the company’s own search settled on Michael D. Capellas, the former Hewlett-Packard president. After a single meeting with Capellas, Matlin indicated he was willing to at least give the new chief executive a chance.

“I sat down with David and said, ‘Is everything cool?’ ” Capellas recalled recently.

Capellas credits Matlin with helping bring together a disparate group of creditors who invested in the company during its swift decline with the hopes of profiting from its bankruptcy. Within this group exist various factions, each trying to get as much as it can under the company’s reorganization plan.

“I think one of the fascinating things about David is that he has pretty natural leadership skills. He is a very calming, good-natured guy. He is a consensus builder. He does a good job of bringing people together,” Capellas said.

As an example, Capellas points to Matlin’s role in soothing raw nerves earlier this month when two dissident groups of creditors threatened to derail WorldCom’s schedule for emerging from bankruptcy. Anticipating a tense night of negotiations, Capellas, a former Kent State linebacker, brought three foam footballs to New York. Capellas keeps the balls in his own office at WorldCom’s Virginia headquarters, where he has a habit of initiating a quick game of catch when tensions run high.

As Capellas negotiated with one group of creditors in one room of the Manhattan offices of WorldCom’s bankruptcy attorney, Weil Gotsahl & Manges LLC, Matlin gathered another group in a large conference room elsewhere. Matlin’s group was not in the best of moods, in part because it was being asked to give up tens of millions of dollars to satisfy the demands of the creditors meeting with Capellas. As talks wore on into the night, Matlin hung a water bottle from the ceiling and broke out Capellas’s footballs. He then organized a raucous competition among 25 men to see who would be the first to hit the bottle from across the long room. The contestants had to ante $20 for each throw. But the target proved elusive and the pot grew to $1,020, according to Glenn H. Hutchins, a co-founder of the investment firm Silver Lake Partners. Sources who were present say the mood was instantly transformed.

Several hours later, the parties reached a deal that allowed WorldCom to stick to its bankruptcy timetable. In the end, the pot was split three ways; Matlin lost about $100.

“Matlin was good at everything in this, except throwing that ball,” Hutchins said.

Matlin worked closely with Hutchins’s firm and Boston-based Bain Capital in a coalition that gave him even greater leverage than his own fund’s investment in WorldCom. Hutchins credits Matlin with developing an innovative business model that combines the high risk of distressed investing with the ability to help a company build value over a long term.

Until July of last year, Matlin was the managing director at Credit Suisse First Boston, where he headed the distressed securities group. But after CFSB acquired the investment-banking firm of Donaldson, Lufkin & Jenrette, there was increased concern that Matlin’s investments in financially distressed companies such as WorldCom would create conflicts with other clients. The separation was amicable, and the $2.2 billion MatlinPatterson portfolio includes all of the assets he managed while at CFSB. Matlin even teamed up with Mark Patterson, a colleague at CFSB.

Matlin had a solidly middle-class youth in Sherman Oaks, Calif., where his father was the treasurer for a grocery store chain. He received a degree in economics from the Wharton School at the University of Pennsylvania in 1983 and his law degree from the University of California at Los Angeles three years later.

In the world of high-risk finance, Matlin has a reputation as someone who swings for the fences. “I think most people would tell you that David either hits a home run or strikes out,” said another Wall Street specialist. Matlin’s star has risen because his successes have payoffs that are so huge that they more than make up for the losers.

While Matlin pays close attention to the companies he invests in, he does not interfere with operations, according Jon M. Huntsman, chairman of Huntsman LLC, the nation’s largest privately held chemical company. When Huntsman, which has $9 billion in revenue, became overwhelmed by its debt last year, Matlin quietly acquired a 49 percent stake in the family-owned company.

In response to a questions from a reporter, Huntsman wrote in an e-mail that Matlin was “the best that Wall Street has to offer. He invests in human talent, as opposed to plant property and equipment, then he listens to management and is not a micromanager.” Matlin showed his support for Huntsman’s leadership earlier this year, when he transferred control of Luxembourg-based Vantico to Huntsman. Typically, MatlinPatterson gained control of the then-struggling Vantico by buying up its bonds and then trading the debt for an 88 percent stake in the company.

According to Capellas, Matlin plays no management role at WorldCom, although the two men often talk on the phone. “David feels, ‘I’m a large investor and I like to stay close to the situation,’ ” said Frank A. “Terry” Savage, who heads distressed investment at the New York investment firm Lazard Freres & Co. Lazard is serving as WorldCom’s financial adviser in the bankruptcy process.

By the time WorldCom had announced that the fraud had taken place, Matlin had already hired a variety of experts, including telecommunications industry consultants, lawyers and accountants, to scour all the publicly available information about the company. In its initial account to the Securities and Exchange Commission, WorldCom said that it had uncovered about $3.8 billion in improper booking. But that turned out to be just the beginning of a series of announcements, with the final tally on the company’s fraud closer to $11 billion. The escalating totals didn’t stop Matlin from sinking at least $200 million of his investors’ money into the company.

Matlin has not revealed his endgame strategy, though most industry analysts believe the telecommunications industry is ready for another wave of consolidation. In that environment, the new MCI will probably be a hot property. Among the buyers may be big regional telephone companies such as BellSouth Corp. and Verizon Communications Inc. By that time, WorldCom’s value is more likely to be pegged to its vast national and international assets and its 20 million paying customers.

Should WorldCom successfully emerge from bankruptcy, Matlin’s membership on the company’s board gives him a seat at the negotiating table and a chance to boost his investment even further.